How CEO stock option compensation shapes analyst coverage

Abstract This study investigates the relationship between CEO stock option compensation and analyst coverage, focusing on forecast uncertainty and forecast error. With equity-based compensation becoming a significant component of CEO pay, it aligns managerial interests with shareholders but also introduces complex incentive structures. Our findings reveal a clear trend: as the proportion of CEO stock option compensation increases, analyst following intensifies, accompanied by a reduction in both forecast uncertainty and forecast error. This implies that despite the potential to encourage opaque financial reporting practices, CEO stock options ultimately foster greater transparency and reduce information asymmetry. Importantly, when comparing different components of CEO compensation, we find that stock options uniquely attract the most analyst attention without triggering earnings management behavior. Moreover, the distinctive structure of CEO compensation exerts a stronger influence on analyst scrutiny than the compensation of other top executives. Our research contributes to the understanding of the crucial role of CEOs' personal incentives in shaping financial disclosure practices and influencing analyst behavior.